By John Filar Atwood
An Oregon district court judge has granted defendants’ motion for summary judgment against allegations of securities violations under the Oregon Revised Statute on the grounds that Oregon’s securities laws do not apply to the transactions in question. In a case involving an unpaid promissory note and amended note between the plaintiff and defendants, the court determined that neither party was in Oregon during the negotiations and plaintiff’s attempts to otherwise prove a connection to Oregon were not persuasive. The court also granted plaintiff’s request for summary judgment on a breach on contract claim, and defendants’ request for summary judgment on fraudulent transfer claims (Sound Foundation v. SCI Fund II, LLC, February 17, 2023, Hernandez, M.).
In January 2017, Derek Sivers, the founder of plaintiff Sound Foundation, agreed to make a short-term loan to defendant SCI Fund II, LLC that was represented by a promissory note. The terms of the note were negotiated between Sivers’ father, who lived in Oregon, and defendant Herbert Wilkins, a managing director for SCI Management, Inc.
Sivers assigned his interest in the note to Sound Foundation, a foreign company registered in the Cook Islands. At all times relevant to the promissory note transactions Sivers lived outside the U.S.
In June 2017, Wilkins asked Sivers to extend the loan, and Sivers agreed to amend the note to extend repayment until December 2018. The defendants failed to repay the note by the extended deadline and the plaintiff subsequently filed suit.
Securities claims. Among the allegations brought by Sound Foundation was that Wilkins made material omissions of fact in violation of Oregon securities law when selling the note and the amended note to Sivers. The defendants countered this claim by arguing that: 1) Oregon securities law does not apply because the notes were not bought or sold in Oregon, 2) the notes are not securities as a matter of law, and 3) Wilkins made no material misstatements or omissions of fact as a matter of law. The court found the first of the three arguments to be persuasive, so did not address the other two.
The judge noted that Oregon law applies to persons who sell or offer to sell a security either when “[a]n offer to sell is made in this state” or “[a]n offer to buy is made and accepted in this state.” Further, an offer to buy or sell is made in Oregon “whether or not either party is then present in this state, when the offer: (a) [o]riginates from this state; or (b) [i]s directed by the offeror to this state and received at the place to which it is directed.”
The parties focused their arguments on whether an offer to sell or buy the notes “originated” in Oregon. The court determined that Oregon securities laws govern if an offer to buy or sell a security arises or is initiated in Oregon, even if neither party is in Oregon when the offer is ultimately made.
Three connections to Oregon. In this case, the court noted, Sivers was living outside the U.S. when he offered to buy the note. Wilkins resided in Maryland and did not travel to Oregon to execute the notes. Instead, plaintiff relied on three other connections to Oregon: Sivers’ father was located in Oregon and facilitated the investment as the agent of Sivers; Sivers intended to invest in Oregon companies; and the notes themselves contemplate existence in Oregon.
The plaintiff relied on State v. Jacobs, in which the Oregon Court of Appeals stated that “the Oregon Securities Law applies if there is sufficient evidence from which the trier of fact could conclude that the offers to sell... originated in Oregon.” The court determined that Jacobs does not apply in this case.
In Jacobs, the court stated, the defendant was an out-of-state agent acting on behalf of Oregon residents who were the sellers of the investment. The agency relationship and the actions of the sellers in Oregon were key to the Oregon Court of Appeals’ decision, the court found. Here Sivers’ father, the Oregon connection, was an agent and not a principal and was an agent of the lender (buyer), not the borrower (seller), the court stated. Jacobs does not provide a basis to impute the father’s Oregon connections to Wilkins, the court concluded.
Based on this reasoning, the court concluded that none of the three Oregon connections on which the plaintiff relied is sufficient to show that the Oregon securities laws cover the transactions at issue. The father’s role in the process, however substantial, was insufficient to meet the statutory requirements, the court ruled.
Oregon law applies to sellers of securities when either the offer to sell is made in Oregon, or the offer to buy is made and accepted in Oregon, the court said. The statute is precise on this point, and the facts here do not meet either set of requirements, the court determined.
On the first point, the court stated that it is undisputed that Wilkins was not in Oregon for the negotiation or execution of the notes. The Oregon connection of Sivers’ father cannot be imputed to Wilkins to satisfy the origination requirement, the court held. On the second point, the court found no evidence that any offer by Sivers to buy the notes was accepted in Oregon, as Wilkins was in Maryland when he negotiated and executed the notes. The court said that even if it were to conclude that the offer to buy the initial note was made in Oregon by the father on behalf of his son, this would still be insufficient under the statute as the offer to buy must be both made and accepted in Oregon for Oregon securities law to apply.
The court also found that the other two Oregon connections on which plaintiff relied did not bolster its case. Nothing in the statutory language or the caselaw supports plaintiff’s contention that the location of the companies for which the investment was destined is in itself relevant in assessing the applicability of the Oregon securities statute, the court stated.
Choice of law clause. Finally, the court noted that plaintiff pointed to no caselaw holding that a choice of law clause in a note should be considered in determining whether the offer to buy or sell originated in a particular state. That evidence may be relevant when evaluating personal jurisdiction, but it does not point to the location of an offer or acceptance, the court held.
Having already determined that the other Oregon connections on which plaintiff relied are insufficient, the court stated that the choice of law clause is insufficient on its own to show that the note originated in Oregon. To hold otherwise would allow the clause to trump the statute and defeat the intent of the Oregon Legislature, the court concluded. Because the Oregon securities laws do not apply to the notes, the court ruled that the defendants are entitled to summary judgment on plaintiff’s securities claims.
The case is No. 3:20-cv-01190.